End of the road for gold?
No, surely not. However it is time to be cautious for sure. What are the risks in gold? Or is it that there are no risks at all, as some readers would like to believe?
Well let us look at some of the risks:
1. It is not an essential commodity: You cannot eat gold. If prices go beyond a point, people will just not consume it! It is not air or water.
2. Remember in the year 2008 gold lost MORE THAN 30% of value – clearly the hedge theory goes. A hedge asset SHOULD move in the other direction, not in sympathy.
3. In the 1980s gold lost about 65% of its value in about 2 years time! Remember both these events happened against a not very strong currency – the US $!!
4. When fear subsides, and things return to normal, the law of demand and supply will apply to all assets – including gold.
5. The Chicago Mercantile Exchange has a very high margin now for gold – and CME is a good reader of volatility. Expect volatility, margin calls, and sales by the lenders – all these do not sound good.
6. No income generating capability: If you go wrong in a portfolio of good shares (i.e. prices have fallen!) at least you are sure of getting a 2% to 4%p.a. return in dividends. This is not great, but will FORCE lenders / investors to discount the cashflow and arrive at a new price. If the company does well, dividends will increase, forcing the value to go up. Sadly in case of gold, I have to hope that there is a GREATER FOOL THEORY and I will be able to find him, so that I can sell. This is not easy.
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